Wednesday, October 29, 2014

Yesterday 11/28/14 Solarwinds
Inc. reported 3Q14 and held a corresponding conference call market close.
Revenue and Non-GAAP EPS came in at $112.9MM vs our $109.MM estimate up 28% yoy and $0.50 vs. our $.43 estimate up 22%
yoy respectively. Revenue highlights included strength in sales from the U.S
Federal business, NA and LATM, license growth of 24% along with robust
recurring revenue growth now 62% of total revenue. Bolstered by the top line
and effective cost control by operational leaders the ever more scrutinized
Non-GAAP operating margin was 45%. This was applauded by investors as the stock
was up ~12% today. Pingdom performed well following the June acquisition and
contributed slightly more revenue ahead of expectations adding “sizzle” to the
beat. During the quarter 54,000 shares were repurchased under the current
$2.1MM share repurchase program which began 3Q13 and expired on June 31st.
In total $1.1MM shares were repurchased.

While Solarwinds has
increased their investment incrementally and focused serving the on premise
market, over the first 3 quarters of 2014 sequential growth rates of both Core
Netman and Sysman product new license sales were up meaningfully. The company’s
product pipeline has been funded by the investments made into the business
which kicked off in late 2013, highlighted during their previous record
quarter 2Q14. This investment has continued to pay dividends in top line
growth despite short-term OM contraction, which to our expectations exceeded company
guidance and street expectations by roughly 200 bps.

The company issued
updated Revenue and EPS guidance of $426.4MM-438.8MM and $1.77-1.79 for FY14
respectively up from $420.5MM-$426.5MM and $1.62-$1.72. More updates on 2015
outlook and growth initiates going forward will be provided on the company’s
analyst day in NYC on November 12th

As
a reminder after our double down in late June our average share price increased
to $35.59. Currently we are up ~35% on the name. We continue to be encouraged by the results and operating leverage
in Solarwinds business model. That being said we believe the near term positives
are largely priced in at current levels. We are downgrading our rating to a
HOLD and maintaining out PT of $52.00 which assumes a 27.1x multiple to our
FY15 EPS of $1.95. Over
the last 3 years the stock has sold for ~29x forward earnings. We believe the slight
discount is attractive as the Pingdom acquisition, license growth acceleration
and operating leverage of business will likely lead to higher profitability and
further multiple expansion.